Individual Mandate Is Ryan Tax Credit by Other Name

March 29 (Bloomberg) -- Of all the arguments being waged
over the Affordable Care Act -- or, as the Obama campaign now
likes to refer to it, “Obamacare” -- the one dominating the
Supreme Court this week is perhaps the most conceptually
trivial.

The individual mandate requires consumers to purchase
health insurance in order to eliminate the problem of free
riders -- people who don’t purchase insurance until the point
when they get sick or injured, or never purchase insurance and
end up passing the costs of care they can’t afford onto the rest
of us. Detractors argue that it unconstitutionally infringes on
personal liberty by forcing Americans to purchase health
insurance. But compare it to three ways of addressing the free-rider problem in health care that are clearly, indisputably,
constitutional:

-- Single payer: The federal government increases income
taxes and, in return, guarantees everyone government-provided
health-care insurance. There is no option to opt out of the
taxes. This is how most of Medicare works, though the insurance
only kicks in after you turn 65.

-- Late-enrollment penalty: The single-payer approach only
holds for “most of” Medicare because the Medicare Prescription
Drug Benefit works a bit differently. For every month that you
don’t enroll after becoming eligible at age 65, your premium
rises by one percentage point.

-- Tax credits: Under various health-care proposals --
including the plan of Republican Representative Paul Ryan of
Wisconsin -- the tax code is changed to give families a tax
credit for purchasing private health insurance. Families that
chose to go without insurance, or simply can’t afford it, would
not receive the tax credit.

Shared Approach

All of these plans share the same basic approach: They
impose a financial penalty, either before or after the fact, on
those who forgo health insurance. Single payer does it through
taxes, Medicare Part D through premiums and Ryan’s plan through
tax credits.

Now consider the individual mandate. Here’s how it works:
Starting in 2016, those who don’t carry insurance will be
annually assessed a fine of $695 or 2.5 percent of their income,
whichever is higher.

Skeptics of government should clearly prefer the individual
mandate to single payer. In fact, the individual mandate was
developed by conservative economist Mark Pauly as an alternative
to single payer. “We did it because we were concerned about the
specter of single payer insurance, which isn’t market-oriented,
and we didn’t think was a good idea,” Pauly told me last year.
In the 1990s, the individual mandate was also the Republican
counterproposal to President Bill Clinton’s health-care bill,
and in 2005, it was the centerpiece of Massachusetts Governor
Mitt Romney’s health-care reforms.

The Medicare Part D model doesn’t really work as an
alternative to the individual mandate because it requires the
federal government to set the cost of premiums. That’s possible
with the over-65 set, because the government controls the
market. To import that idea to the under-65 market, however,
would require vastly more governmental intrusion into the
health-care space.

The tax credit, meanwhile, is essentially indistinguishable
from the mandate. Ryan’s plan offers a $2,300 refundable tax
credit to individuals and a $5,700 credit to families who
purchase private health insurance. Of course, tax credits aren’t
free. In effect, what Ryan’s plan does is raises taxes and/or
cut services by the cost of his credit and then rebate the
difference to everyone who signs up for health insurance. It’s
essentially a roundabout version of the individual mandate,
which directly taxes people who don’t buy health insurance in
the first place.

“It’s the same,” says William Gale, director of the Tax
Policy Center. “The economics of saying you get a credit if you
buy insurance and you don’t if you don’t are not different than
the economics of saying you pay a penalty if you don’t buy
insurance and you don’t if you do.”

A Harsher Penalty

Interestingly, Ryan’s plan imposes, if anything, a harsher
penalty on those who don’t purchase health insurance. Ryan’s tax
credit is far larger than the individual mandate’s penalty, and
much easier to enforce. Under Ryan’s plan, if you don’t purchase
insurance, you don’t get the credit. End of story. Conversely,
the Affordable Care Act doesn’t include an actual enforcement
mechanism for the individual mandate. If you refuse to pay it,
the IRS can’t throw you in jail, dock your wages or really do
anything at all. This leads to one of the secrets of Obamacare:
Perhaps the best deal in the bill is to pay the mandate penalty
year after year and only purchase insurance once you get sick.
To knowingly free ride, in other words. In that world, the
mandate acts as an option to purchase insurance at a low price
when you need it. For that reason, when health-policy experts
worry about the mandate, they don’t worry that it is too
coercive. They worry it isn’t coercive enough.

The mandate is considered more effective than tax credits
because people seem more inclined to take action to avoid
penalties than to receive benefits. That’s worked extremely well
in Massachusetts, for instance, where there’s been almost no
free-rider problem at all. So while it’s not different as a
matter of economics, it’s a bit different as a matter of
behavioral economics. In that way, the mandate does a little
more to solve the free-rider problem with a little less action
from the government.

Randy Barnett, a conservative law professor at Georgetown
University, agrees that there’s some similarity between the two
approaches. But he warns that that doesn’t make them legally
equivalent. “Just because the government does have the power to
do X, doesn’t mean they have the power to do Y, even if Y has
the same effect as X,” he says. “There’s no constitutional
principle like that.”

Peculiar Spot

Although that’s true, it also leaves us in a peculiar spot.
The constitutional argument over Obamacare is a dispute over a
technicality. We agree that it’s constitutional for the
government to intervene far more aggressively in the market. We
agree that it’s constitutional for it to intervene in an almost
identical, albeit slightly more roundabout, manner. We’re just
not sure if the government needs to call the individual mandate
a “tax” rather than “a penalty,” or perhaps structure it as
a tax credit. As Pauly puts it, “This seems to me to be angelic
pinhead density arguments about whether it’s a payment to do
something or not to do something.”

Of course, this battle isn’t really about the
constitutionality of the individual mandate. Members of the
Republican Party didn’t express concerns that the individual
mandate might be an unconstitutional assault on liberty when
they devised the idea in the late 1980s, or when they wielded it
against the Clinton White House in the 1990s, or when it was
passed it into law in Massachusetts in the mid-2000s. Only after
the mandate became the centerpiece of the Democrats’ health-care
bill did its constitutionality suddenly become an issue.

The real fight is over whether the Affordable Care Act
should exist at all. Republicans lost that battle in Congress,
where they lacked a majority in 2010. Now they hope to win it in
the Supreme Court, where they hold a one-vote advantage. The
argument against the individual mandate is a pretext to overturn
Obamacare. But it’s a pretext that could set a very peculiar
precedent.

If the mandate falls, future politicians, who will still
need to fix the health-care system and address the free-rider
problem, will be left with the option to move toward a single
payer system or offer incredibly large, expensive tax credits in
order to persuade people to do things they don’t otherwise want
to do. That is to say, in the name of liberty, Republicans and
their allies on the Supreme Court will have guaranteed a future
with much more government intrusion in the health-care
marketplace.

(Ezra Klein is a Bloomberg View columnist. The opinions
expressed are his own.)